Are you a finance manager or controller and struggling due to a lack of effective supplier invoice approval workflow?

Then THIS strategy is for you.

Using this strategy, our Clients have seen anywhere from a 35-50% reduction in the time spent on processing invoices.

An ineffective invoice process is a reason your team is always struggling to process invoices on time.

The difference between a well-run Accounts payable function and a chaotic AP process is the effectiveness of the supplier invoice approval workflow.

It is not the case that the controllers or CFO’s don’t understand the criticality of AP automation, in fact, most companies have invested in some form of invoice approval software so that they can automate the review and approval process. But is the automation helping in reducing the time spent on processing invoices?

Most of the invoice approval process is a combination of manual or automated processes. The process is generally cobbled together. Here is a common AP business process:

1. Receive invoices via email or mail.

2. Scan and put them in a shared folder, or online storage like Dropbox.

3. Followed by a manual process to review the invoice and then identify who needs to approve the invoice.

4. Email the person and then send multiple reminders so that you can get the invoice processed.

5. Finally, enter the invoice into your accounting system like QuickBooks so that they can process payment to the supplier.

Does this process look familiar to you? We call this Invoice maze and to navigate this maze, you need to be very skilled. Give this process to a new person and they take weeks to fully understand the nuances of the process. Yes, we exaggerated on the weeks!

 

So what is the solution?

The solution to an efficient invoice processing process is to first clearly identify the optimum process and then use software for automating the invoice approval process.

Yes, it is simple but still many companies directly jump into automation first without assessing the efficiency of the current process.

The key is not to look at the process in isolation but to review this in conjunction with your purchasing or procurement process.

In this article, we will cover:

1. How to assess the cost of your manual invoicing process.

2. How to design an effective invoice approval workflow.

3. How to use AP automation to supercharge your invoice approval process.

Our goal is to get rid of the maze and provide you with a simple process that helps you reduce the time spent on processing invoices. Along with time savings, it also has added advantage of fraud prevention.

But before you move forward, download the invoice process optimizer

Then follow along and see how you can cut 40% invoice approval time by leveraging these strategies.

Download our Invoice process optimizer

and follow the strategies to reduce the invoice processing time by 40%.

If you would rather see how our tool can supercharge your invoice approval process,
Schedule a free demo and we will show you how to successfully navigate the invoice maze.

Let’s get started

1. What is the cost of your manual invoice approval process or workflow?

Increasing the productivity of your team starts with understanding the cost of productivity loss. It helps you build the business case and provides key metrics you would need to measure the return on investment in this process.

Here is a typical invoice processing cost with a manual invoice management process:

You could use the following cost to calculate your invoice processing cost or you could use some existing benchmarks. The following is the breakdown

a) Systems cost

These costs include all the systems you are using to process the invoices. Here are some examples of the system costs

1. A tool to capture invoices and scan them.

2. A tool to store invoices online for easy access.

3. A tool for routing the invoice for approval and sending reminders.

4. A tool to upload data to your accounting system.

The easiest way to calculate this cost to look at the past 12 month invoices or your credit card statements and identify charges related to these systems.

b) Data entry costs

This is the cost to manually enter the data into your accounting system.

As per a recent survey by Levvel 86% of the SME’s and 65% of mid-market firms are still processing the invoices manually.

The easiest way to calculate this cost is to identify the FTE’s who are working on processing the invoices. You might have multiple shared resources working on processing invoices. If you are even processing 100-150 invoices/month. You could assume .5 FTE as the cost.

The cost per FTE would vary but $65,000 annually is a safe bet for the cost.

c) Time spent in approvals 

As per a recent study by research firm Levvel, the average invoice approval cycle is 2-3 approvals per invoice.

This is the time spent by different people in approving the invoices. You could easily assume $100/hour or more as the cost and based on the time spent, one can calculate the cost of the approval process.

d) Calculating your invoice processing cost

Now you have all your costs, all you have to do is to take the annual volume and total cost and calculate the average cost to process an invoice.

Let’s assume you are processing 3000 invoices annually. If the average cost is $10 as some of the benchmarks suggest, then the total annual cost is $30,000. Now that might not be a lot depending upon your company size but as you scale your business, this cost would also increase.

So any measure you take now to reduce the time spent on processing invoices will help to reduce the cost over the long term.

 

2. Creating your invoice approval process flowchart

Is your Invoice approval workflow process time-consuming?

An invoice approval process is one of the biggest challenges for the A/P departments. As per a recent survey, 60% of the participants reported the Invoice approval process as one of the challenges for the AP team.

It is either too long or complicated and hence they land up spending too much time on it.

Now some of you might say that it is better if the invoice takes long because then we can pay vendors late and have less strain on the working capital!

This might be true in some cases but not always. The two challenges company often face are:

1. Lack of complete visibility into your cash flow

If an invoice is stuck in an approval process, then most likely it is not yet entered into your accounting system. The finance department then has to deal with a lack of visibility into the working capital requirement.

Granted, you can look at historical invoice data to come up with some estimates on what your monthly outflow is. But if you are borrowing money to fulfill your A/P requirements then you could be paying additional interest which you can easily avoid.

2. Delayed payments lead to late fee charges

The vendor might charge you late fees if the invoice is paid late. Now in the short term, that might not be a lot of money but over a year, the late fees could easily add up. When was the last time you checked on the late fees?

3. Creating your invoice workflow flowchart

Here is a sample invoice process workflow:

To improve your current process, you need to identify the process flow as well as current bottlenecks. It might sound overwhelming to create an invoice workflow flowchart but in fact, it is very simple. Here is the step-by-step process.

Step 1:

First, list all the methods by which you currently receive invoices from the vendors. If possible, break up the % of invoices by the method you receive them. For example

1. Paper Invoices received by mail – 30%
2. Invoices received by email – 20%
3. EDI invoices – 30%
4. Invoices sent directly to the stakeholders – 20%

Step 2: 

Next, detail how these invoices are processed after they have been received. For example, you enter the invoice data in an invoice workflow system. Or you could be just sending the invoices first for review and then keying the data in the relevant system.

Step3 :

After that, you need to detail your current approval process. Here is what you need to cover in this step

1. Who is approving the invoice and when? For example, an invoice needs to be approved when there is no PO # on the invoice. If all your invoices are currently sent for review, then clearly mention why you are doing that.
2. If there are exceptions then who review the invoices.
3. Do you have different authorization limits based on the invoice amount? If yes, mention that in the workflow

4. Optimizing your invoice approval workflow

The next step is to identify areas in which you can optimize the current invoice approval workflow.

Here are some questions you should ask yourself and your team

1. Can we move some vendors to electronic invoices so that we don’t have to scan paper invoices?
2. Can we move some vendors to EDI/Electronic data interchange so there is no need to send invoice documents? Most of your common vendors like Amazon.com already support this.
3. Can we implement a 3-way match process so that the invoices can be automatically matched to the PO and receipt, hence avoiding the need for workflow?
4. Can we set up tolerances so that the invoice can be automatically approved if the invoice amount is over the order amount but within the set threshold?

Automation does help with some of these optimizations and we will cover that in the next process

5. Software for automating your invoice approval process

In this section, we will look at optimizing the invoice approval workflow with the help of technology. Our goal is to highlight key technology features you would need to set up an effective invoice approval process.

Reducing the time & effort to enter invoices.

The first step of optimizing the invoice workflow is to streamline the process for capturing the invoices from your vendors. We recommend centralizing the process for accepting invoices from your vendors.

There are a couple of ways technology can help you do that.

1. Automatically receive invoices using EDI/cXML. EDI stands for Electronic Data Interchange which is an old data standard for exchange documents electronically. You could also use cXML which is more modern and very well suited for procure-to-pay transactions. If you are using a modern purchasing system, then these capabilities are already built for you.
2. Use a supplier portal so that suppliers can submit the invoices electronically. This process is very effective when you are using the purchase order. If you use a purchase order then suppliers are always invoicing against a purchase order which eliminates the data entry errors.
3. Setup a centralized email for your suppliers, for example invoices@yourcompany.com and ask the vendors to send the invoices to that email only. It not only solves reduce paper invoices but also ensures that the invoices are not lost.
4. A system to scan the incoming paper invoices.

5. A 3-way match process for auto approving invoices

Once the invoices are captured, you need to then automate the matching process for matching the invoice with the purchase order and receipts, also called a 3-way match process.

The idea here is to use technology to check the invoice against an approved purchase order so that you don’t have to spend time manually figuring out whether the invoice is approved for payment or not.

If it is a tangible product purchase, then a receipt is the confirmation that the product has been received by the buyer.

If it is a service purchase, we highly recommend an invoice review process so that the end consumer of that service can confirm whether the service has been received or not.

An automated routing engine to route invoice exceptions and maintain an audit trail

We talked about the automated matching of the purchase order, invoices, and receipts but what happens if these documents don’t match with each other.

For example, you ordered 10 widgets, the vendor shipped 10 but invoiced you for 11.

If you have an integrated purchase order and the invoicing system then the exception management can be fully automated.

All you have to do is to define business rules on what should happen when the system finds an exception. For example, you could set up a process that the original requester should be automatically notified to review the exceptions in the system and provide guidance.

In our experience, ProcureDesk customers get the biggest benefit in the invoice matching process because the AP team is not spending time on routing invoices for approval.

Now if you have a single-person AP team, the automated matching and routing process is a must!

Integration to avoid redundant data entry

If you are using an integrated purchase order and invoicing system, then you have already entered the data once or the invoices are electronically received for you.

You don’t want to lose these productivity improvements by again spending time entering the data into your accounting systems like QuickBooks, Sage Intacct or Netsuite.

So the key piece of the integration is automated data sync with your accounting system so you can avoid redundant data entry.

Communicating with stakeholders for better adoption

As we noted above, the biggest benefit of automating the invoice approval workflow is the ability to match and route the exceptions for approvals. Employees are a key part of the approval workflow process so we need to make sure that we are communicating the changes to them.

To make sure that the new approval process is well adopted, you need effective communication with employees. Here are the key things to address in internal employee communication

Receiving invoices from vendors

In most of ProcureDesk deployments, we see a change in the way invoices are received by the A/P department. You are changing from a manual paper-based invoicing process to an automated invoicing process and that is what you need to communicate to employees.

For example – if you need suppliers to send invoices directly through a portal then employees who are working directly with the vendors can communicate it to them. We are not saying that you should inform vendors about this change through individual stakeholders. What we are suggesting is that you can use employees to reinforce the message to the vendors.

How the exception process would work

If you are implementing a new invoice exception review process then employees should know what to do when they get a request to resolve an exception.

Let’s say that the employee order 10 reams of paper from Amazon. The order is delivered and Amazon sends you the invoice but there is no receipt.

Even if your purchasing system is automatically sending automated emails to remind users to create the receipt you still need to let employees know what is expected out of them. In this case, they just need to know that a receipt needs to be created.

Similarly, if the unit price doesn’t match between documents then who resolves the exception and what they need to do to effectively resolve it.

Reporting issues with the process

Your process is not going to be perfect on day 1, so it is imperative that you have a feedback loop setup.

It doesn’t have to be complicated. A simple process like sending an email with the feedback is good enough to start with.

6. First 90 days and the plan forward

In the previous sections, we talked about setting up the invoice approval workflow and the related automation related to capturing invoices electronically.

In this section, we want to provide you with some markers to track whether the invoice automation and invoice approval is working or not. If you are just getting started with invoice process optimization, the following KPIs should be a good start.

Number of electronic invoices submitted

What is this?

This measure tracks the invoices which are submitted electronically. This includes invoices submitted through Electronic Data Interchange or through a supplier portal.

Why it is important?

Electronic invoices not only reduces the error from an invoice matching perspective but also reduces the data entry burden on the A/P team

How to measure it?

Total invoices submitted electronically/ Total invoices submitted for the month.

This is a monthly metric.

You should see a month-by-month increase for this metric.

Invoice exception rate

What is this?

The number of exceptions is the total exceptions generated by the system. An exception is generally an issue with an invoice. For example – the invoice quantity does not match with the order quantity or the invoice total doesn’t match the order amount.

Why is this important?

This is a direct measure of the accuracy of the data submitted by your suppliers. The lesser the number of exceptions, the more accurate the data. Now, this is not always the vendor’s fault, it could be that the purchase order was not generated properly, and that caused the mismatch between the purchase order and invoice.

How to measure it?

The invoice exception rate is measured as

Total invoice exceptions in a given month/ Total invoice process in a month.

This is a monthly metric and you should see a month-on-month downward trend for this.

Average time from invoice entry to send for payment.

What Is this?

This is the average time it takes for you to process an invoice. There are multiple steps to process an invoice. You could potentially look at each subprocess but to start with, you can just measure the end-to-end cycle time.

Why is this important?

This is a direct measure of the efficiency of the whole invoicing process. The more efficient the process, the higher your team’s productivity.

How to measure it?

This is an average of the time takes to process each invoice. You should be able to get this easily from your invoice processing system

Now your turn!

An efficient Invoice approval process is the key to increasing the productivity of the AP team.

By implementing an invoice approval process

1. You can reduce the time spent on processing invoices.
2. You can increase compliance to set purchasing policies by matching the invoices to pre-authorized spend.
3. Take advantage of early-pay discounts. Since you can process invoices faster, you can take advantage of any early pay discount.

So if you are looking to get better cash flow visibility without spending endless hours on processing invoices, implement an invoice approval workflow to streamline the purchase-to-pay process.